Three University of Malawi (Unima) economists have said the contractionary or tight monetary policy the Reserve Bank of Malawi (RBM)is implementing is constraining agricultural output, thereby driving up year-on-year inflation.
In the study titled ‘Macroeconomics and finance in emerging market economies: Monetary policy shocks, agricultural growth and food inflation in developing agrarian economies, misled central banks?, the trio of Edward Leman, John Magombo and Lucius Cassim assessed RBM’s decisions, agricultural sector and inflation reactions between 1986 and 2023.
Reads part of the report: “We observed subdued agricultural sector growth following a percentage increase in policy rate. Specifically, when the Reserve Bank of Malawi raises the policy rate by one percent, agricultural productivity decreases by about 0.011 percent.
“At first glance, the results may seem to confirm the existence of an interest rate channel of monetary policy in Malawi where the increase in nominal interest rate contracts current consumption, which in turn results in subdued output.”
The study said the central bank could be misled by conventional monetary policies because the tightening stance reduces consumption and output, especially in agrarian economies, resulting in rising food prices and general inflation.
“The standard monetary policy actions where the central bank ‘fights’ inflation through raising the policy rate achieves the opposite. Through its negative effect on agricultural output, it fuels food inflation, which eventually triggers overall inflation,” reads the study.
It further said reducing the policy rate in times of high inflation seems to be an approach that would provide gains in both reduced inflation and growth of the agricultural sector.
RBM spokesperson Boston Maliketi Banda was not available for comment.
But National Planning Commission director general Fredrick Changaya in an interview said while he was in agreement with the diagnosis, highlighted the need for further analysis on the types of agricultural value chains targeted to ensure the economy benefits fully from the sector.
He said the monetary policy frameworks available for use are relevant where inflation is a monetary problem not where inflation is a structural issue.
“Reducing policy rate still assumes any agriculture is good agriculture. This defeats value chain ranking on productivity and efficiency,” said Changaya.
He said there is need to apply deeper analysis even within the agriculture sector to ensure that value chains make a difference.
The study comes months after a debate ensued on the need for commercial banks to lower lending rates from the current 36 percent to give the real sector access to affordable credit in a campaign dubbed ‘Interest rates must fall’.
The reference rate also known as the base lending rate, is currently at 25.3 percent, but commercial banks charge interest rates as high as 36 percent depending on the risk profile of the borrower.
In an interview on Friday, entrepreneur Hastings Bofomo Nyirenda said economic transformation is unattainable if interest rates remain high at above 35 percent, which crowd out the private sector.
He urged the RBM to be the first to adopt a policy stance that facilitates a favourable interest rate regime.
Bofomo Nyirenda, who is also executive director and partner at Grant Thornton Malawi—a business advisory and auditing firm, said: “Due to high interest rates, private sector players are failing to access capital and are closing down, resulting in job cuts and reduced taxes.”
Nico Capital Limited CEO Misheck Esau is quoted as having said that the economy is in a state of stagnation that requires a fundamental shift to achieve growth.
He said: “We need greater access to cheaper credit for production to happen. We need to produce to be able to export to generate foreign exchange.
“We believe monetary economists have tried every trick in the book to lower inflation, but it is not working.”
Esau suggested that lending rates to productive sectors should be reduced to as low as 15 percent supported by a basket of other measures and incentives to avert certain unintended consequences.
The benchmark policy rate, the rate at which commercial banks borrow from the central bank as a lender of last resort, has for the past four years risen from 14 percent to 26 percent largely due to rising inflation rate.
Inflation rate is currently at 28.7 percent as of September 2025, according to the National Statistical Office.
